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While fund managers do have some leeway, these aims help the managers hone in on certain sectors or styles pertinent to the individual mutual fund. In addition, the manager will evaluate risks—both single stock and macro-economic—versus potential returns.
On a daily basis, the fund manager will often be in charge of actually placing orders and buying/selling individual stocks/bonds from the portfolio. Some smaller funds also have the lead manager conduct marketing and back-office duties, as well as establishing ethical standards for the business.
For larger mutual funds, the lead fund manager is often supported by a staff of analysts, traders and other people who monitor the markets, make trades and perform other duties at the fund. This support staff is critical in making sure the fund operates in an efficient and profitable manner. However, it is the lead mutual fund manager’s job to guide the overall direction of the portfolio. Ultimately, he or she is calling the shots on just what it will own and when.
Sometimes, mutual funds are managed by a committee process – such as with the Dodge & Cox family funds. Here, lead fund managers will bounce ideas off of each other and stocks are selected via a vote. Another common approach is a multi-manager fund. Here, each management team is given a percentage of the fund’s assets to guide and are only responsible for those dollars. A single lead manager will decide on who will be responsible and how much of the fund’s assets are given to manage. Several of Vanguard’s popular mutual funds use this methodology.
How they do this is via what’s called “style-drift.” Basically, it’s how much play the mutual fund manager has with regards to changing the weighting in its target benchmark. He or she may over or underweight certain sectors (like adding more tech or reducing utilities, for example) versus their benchmark index to gain additional returns. The fund’s prospectus will outline exactly the maximum and minimum amount a fund manager can stray.
Ratings services Morningstar and Lipper help individual investors by taking all the funds in certain categories (large-cap growth, developed market international, etc) and comparing them to each other. Morningstar will apply a star-rating system to the funds – with the top funds in a group earning four or five stars. These are generally funds that “earn” their expenses above their target benchmarks. Lipper uses a similar system of above average or below average to gauge a fund’s performance.
Be sure to also see What is a Mutual Fund Management Fee?
However, not all index funds use a full-replication strategy. Some will only buy most—but not necessarily all—of the stocks within the benchmark index. The idea is that the fund will attempt to closely match the overall investment attributes of the index. The fund manager’s job here is to buy/sell stocks within the index to closely match the sector weightings and provide a large spread of firms to cover the underlying index. This sort of indexing strategy is most likely found in international and emerging market funds, where buying all the stocks within an index could prove difficult.
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